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Updated almost 15 years ago, 01/29/2010
Does anyone use a Checkbook IRA LLC?
I currently utilize a self-directed IRA. My IRA monies have been invested in a real estate project. I'm coming out of that investment soon and I now want to use those IRA monies for buying at trustee sales. This "Checkbook IRA LLC" seems like it could be the ideal vehicle for this. I'm not familiar with their workability, validity with IRS, etc.
Does anyone use or know about these? Thanks in advance.
Guidant financial services has the best IRA LLC. Look them up. They do cost much more to set up (around $3k) but you then have the immediate access to the funds required in tax lase investing.
Thank you. Yes, I just learned that the expense if pretty high. But I think I just discovered a low cost and more optimal method. Creating a pension plan for my corporation, giving me full control and instant access to the money.
I am not familiar with pension plans so my first question is can an IRA (or any other qualified plan) be rolled into a pension that you administer?
Have you looked into a self-administered 401k? May be a much better option for you with more control, less rules, and more advantages than a SDI.
I'll look into the self admin 401k. Might be workable, as long as I have control of the money and immediate access to it whenever needed.
The Guidant guys can help with setting up the self-administered 401k Will describes. I used Guidant. Pricy, but they go through the whole process in detail. Even with these other plans, you'll need some legal help.
The type of plan you use will depend on the type of investing you want to do. The IRA LLC is good for passive investments, such as making loans or owning rental property free and clear. If you have rentals with loans, or do something active like flipping or wholesaling, it will be subject to UBIT.
The self directed IRA is good if you're going to do something active, but has restrictions against passive investments.
The Guidant folks are really helpful. If you call, they'll pass you along to someone you can discuss this with and decide on the property type of account.
Alfred,
Instead of a 401(k) you might want to look into a 401(a) Profit Sharing Plan. Contributions to the plan will be a deduction to your corporation. You will be the trustee of the plan and you have full control over the plan investments.
The rules that govern qualified plans such as 401(k)s and profit sharing plans allow much more flexibility in your investment options, the ability to borrow, mortgage the properties in the plan with out getting hit with UBTI.
I have set up a couple of thousand 401(a)s over the years for my client's corporations and LLC and many of them actively invest in real estate in their plans.
I don't understand this UBTI. Will have to talk to my CPA about it, and that costs $.
Until then, can anyone give me a bit of an understanding on it? If you buy a rental property or a business with your SDI IRA monies... the income would be going back into your IRA. An IRA is tax deferred. Why and how could there be a tax (UBTI) on that income? If this is the case then an IRA isn't a tax deferred retirement account. Could someone possibly clear this one up? Thanks in advance.
Originally posted by Alfred Bell:
I don't understand this UBTI. Will have to talk to my CPA about it, and that costs $.
Until then, can anyone give me a bit of an understanding on it? If you buy a rental property or a business with your SDI IRA monies... the income would be going back into your IRA. An IRA is tax deferred. Why and how could there be a tax (UBTI) on that income? If this is the case then an IRA isn't a tax deferred retirement account. Could someone possibly clear this one up? Thanks in advance.
This definition of UBIT taken from IRS publication 598:
"... if an exempt organization regularly
carries on a trade or business that is not sub-
stantially related to its exempt purpose, except
that it provides funds to carry out that purpose,
the organization is subject to tax on its income
from that unrelated trade or business."
IRS URL : http://www.irs.gov/charities/article/0,,id=96104,00.html
But I would strongly advise speaking with your chosen IRA custodian to put it all in plain English.
Your all making great comments about Self Directed IRA's. They have their place for some clients. However, The Ultimate Plan for RE. Investors is the Solo Roth 401K.(Self employed bus owners) Don't need the LLC, Don't have to worry about UBIT etc. It's not only a Self Directed plan but it's Self Managed-no outside custodian-You are the custodian. You also, can rollover all other IRA', s Keogh's, Sep's, etc, into one plan. You can also legally combine your IRA with your Spouse's IRA.
The other outstanding feature is that you and your spouse can take out private loans up to $50K ea. and use the money for anything you wish.
Mathews Realty Group
Agent/Investor
Retirement Planning Advisor
(removed)
Matt Matthews:
Thanks Matt.
I've got questions about this.
Do you know someone expert in this? Can you give their contact data if so?
Alfred, UBIT applies to a non-profit entity like a university bookstore. Even though the university is a non-profit, the book store is considered an "unrelated business", and is subject to UBIT. Traditional IRAs fall into this category, too.
An active business, like wholesaling or fix and flips, would be an active business and would be subject to UBIT. There are exceptions. One is rental income. If you own a property free and clear in your IRA, it is not subject to UBIT. But there's an exception to the exception. That is financing. A fraction of the net rental income, after all the normal deductions, is subject to UBIT. That fraction is the total debt divided by the basis.
Then, yes, you will pay taxes when you take the money out. So, income inside an IRA from an active business, or from debt financed rentals is subject to double taxation.
Depending on the type of investing you are doing it doesn't matter whether you are using an IRA, 401(k) or 401(a) there are still UBIT issue if you are running an active business.
Qualified plans have greater leeway in regard to UBIT exclusions than an IRA in the fact that the qualified plan can leverage the assets but no plan can run an active business and escape UBIT.
I'm not too hot on retirement or tax deferred vehicles. This IRA is an inheritance from my dad, known as a stretch or inheritance IRA. I transferred it into a SDI and invested in a construction project at 10%. The project is almost over and the capital will be coming back to the IRA shortly.
I really don't like not having full control of and access to my money and all of the rules and regulations connected to this.
The amount is 120k. I'm actually thinking that the most optimum thing to do is... 1) set up a good money making activity ahead of time... 2) just pull the money out of the IRA on Jan 1st 2010... 3) put it into action (example: buy a little business with decent income)... 4) I won't have to pay taxes on IRA until April 15 of 2011, so get an extension until Oct of 2011 and I've just deferred taxes on the IRA money for close to 20 months... 5) I will have made money from the business I bought and can use some of that to pay off the taxes owed on having pulled the IRA... 6) Now taxes have been paid on the IRA money I took out and that money is now mine to do with as I see fit.
I know this may seem wild or unconventional to some. I'd like any feedback you might have on this above strategy I just laid out.
I am not saying that is a bad thing as you SHOULD be paid for your services, only to point out your opinionated statement does not come without bias.
Alfred,
If you are not "too hot" on retirement or tax deferred vehicles, you need to get hot as they are one of the greatest strategies/advantages to planning for retirement.
I would NOT suggest you pull the cash out with your 20 month deferred plan as you will not only pay the marginal tax rate on the withdrawl, but you will also get hit with an additional 10% penalty.
That said, you will basically end up with only 1/2 of your funds after taxes and penalties.
I would strongly urge you to reconsider that course of action and educate yourself more on the subject, both right here on BP and any other sources such as books, news articles, programs, etc.
If you are self-employed, I believe the solo 401k and now, the 401(a) plan to be a great choice over the SDI.
For those you are not self employed, the SDI is a great feature, much more beneficial than IRA accounts managed by others who ONLY care about how many fees and commissions they can earn from you, regardless of the fact that you make or lose money.
There are several legal and moral strategies to use qualified plan funds and benefit yourself outside of the plan all while benefiting the plan at the same time. :lol:
Will B
Thanks for the info and advice. Much appreciated. I won't have a 10% penalty on IRA because it is an inheritance IRA. But I'll pay the marginal income tax rate for sure. If I pulled it out of IRA I'd have 120k on top of any other earned income for that year (this would actually be a good time to do it because I'm not earning much $... I'm working on a start up business and living off of passive income from my real estate investments). Let's say I bought a business with that 120k that nets 50k per annum. The business could probably pay off the taxes on the 120k and from that point I'd be free.
The only prob with a solo 401k is that I can't roll the inheritance IRA into it. So, because it is an inher IRA I have to stick with an SDI or Chkbook LLC IRA or just take the money out and run.
Other key data, I don't believe in retirement and will never retire. Plus with the IRA , taxes will be much higher when I withdraw that money in the future and the government is gonna get its due anyway. I'd rather have the money now to build businesses and buy assets with without any restrictions. I can maximize that 120k and make a lot more money with it outside than I can inside of the IRA (even if I'm paying taxes). When I reach old age I'll have businesses and income properties to take care of me or sell. Screw the government, social security and their stupid retirement accounts. I'd rather be free and take care of myself. That is my viewpoint and I think I'm right about it. Altho, my CPA rolled his eyes when I suggested it to him. I'm either outside the box and able to prosper on a higher level with this strategy... or, I'm out to lunch.
I actually prefer the ROTH option as the best means for tax free growth and tax free withdrawls. Perhap sthat is an option to look at for you as well.
Yes, but if I have to pay taxes on the $ before it goes into a Roth... I might as well take it out in full as planned.
Don't think I can switch my inher IRA to a Roth IRA without having to pay the taxes.
I'm not that concerned about earning income on a tax deferred basis (IRA, 401k, etc.) would rather earn income and pay the taxes as I go. they'll be lower now then they will in 3,5, or 10 years. Plus I can use all the tax advantages, strats and legal tax avoidance actions to minimize my income tax. I'm still thinking bail out of IRA.
That said, if you have opportunity to invest the funds outside of the IRA and make substantial returns to offset your tax exposure, then you have a viable option.
Will:
Ah ha. Good idea. Going the route of the Roth IRA might be the best and least costly way to get my money OUT from under governmt rules and FULLY into my control. Altho, having approximately 20 months to use the IRA money to generate a lot of money, deferring paying the tax for as long as possible via extensions, and then finally paying the taxes out of the profits I've made (and will continue to make), may put me further ahead.
Let's face it. There ain't no investment vehicle inside of an IRA that 120k can buy that is going to give you the return
that you'll get from a little business that is a good little money maker. And... you have full control and don't have to deal with IRA, 401k, 401a, etc. etc. rules.
I'm going to toss out one of my favorite sayings on this subject and then add a little to this discussion: "Most people don't know what the hell they're talking about when it comes to taxes."
That said, this is what I will add in regard to the tax stuff stated above. Taxes are due April 15 or the next business day if the 15th is on a weekend. You can file for a 6 month extension to FILE your taxes but the $$ is due 4/15. So if you file your taxes 10/15 and owe the government $$, you will owe interest and penalties. Now, in the county where I work, there was some flooding last year right before tax time so the IRS allowed residents, and people who used accountants in the counties affected by flooding (IRS came out with a list) had an extra 2 months to file penalty and interest free. If it's enough money, it might be worth it to have your taxes done out of state for 2 months of interest on the taxes. My guess is Fargo, ND will have similar extensions this year.
As it comes to self-directed IRAs and investing in real estate or other businesses-it is extremely risky via the IRS rules. I won't claim to be an expert but I have read that even if you manage your own property in a self directed IRA that is against IRS rules and they could disqualify the entire IRA meaning you would have to pay tax on the entire amount right then plus the 10% penalty if you're under age 59. I know there are other pitfalls too but I am not well versed in them. I would suggest, if you are interested in a self-directed IRA that you talk to someone other than the seller of self-directed IRA accounts (kinda self evident when stated that way)--that is talk to someone who is familiar with them and knows both sides of the issue. I'm not saying that you can't do it, just that the technicalities are very easy to cross the line and the penalties are steep IF you get caught. I'm not saying the IRS is looking at this as a priority to enforce but, if you think about it, the technicalities are easy to break and most of the people doing it are concentrated in a handful of companies. Easy way to bring in some extra tax revenue from some 'evil landlords'.
This is one of the upsides to dealing with Guidant. Even though they're expensive, they have an attorney work directly with you and go over all the ins and outs of what you can and can't do. For example, I've also seen the caution about managing your property. But the attorney said this should not be an issue because the time involved was minimal. If you think about it, deciding which mutual funds to buy in an IRA can be time consuming, too, if you do it carefully. And that doesn't invalidate the IRA. OTOH, he warned against buying any property too near other properties you owned, since that could potentially convey benefits to your other properties.
Converting to a Roth does not eliminate the disqualified persons or prohibited transaction rules. Just the taxes.
I am very knowledgable on this topic (however, I am not a CPA or Tax Attorney) and even teach investors the ins and outs and how to's. I do not sell SDI acounts so my advice and expertise comes without bias.
My/one interpretation of the IRC is that by performing your own management/work on the property you are either 1. making excess contributions or 2. receiving personal benefit from the IRA. My understanding of RE in IRAs is that the IRS has been more quiet on the issue than saying "Yes" to it. I would be interested in any documentation from the IRS that would show that my view is a misunderstanding.
Things to think about though:
1. No loans. You can't pledge any part of the IRA for a loan or that portion is disqualified. Meaning the best you can do is get a non-recourse loan for your IRA. Hard to find and much lower LTV-is it even possible now without breaching the related party issue? Leverage is one of the major pluses of RE investing. Remove the leverage and are you really going to earn much more than the yield on REITs or Bonds on an effort vs return basis?
2. No commingling of funds. You can't commingle your IRA's funds with your funds or the entire IRA is disqualified. Technically meaning you can't run out to Home Depot and buy a new kitchen faucet with your credit card in an emergency. Also means that you have to sit on your hands and watch your business fail if you run out of cash in your IRA even though you have the money or could get the money outside of your IRA.
3. You pay no taxes so there are no tax advantages to depreciation.
4. Depending on the type of RE investing, you are taking potential capital gain taxes and converting into income taxes. Can be said for investing in stocks too so depending on your situation, this may or may not be an issue.
5. Exit strategy is harder. You have to start taking distributions at age 70 1/2. If you have property you have to get it appraised and then distribute the required amount. If you don't have enough cash, you're forced to sell. Same thing happens with stocks but stocks are much more liquid.
I don't want to come off as saying this isn't possible, just that it's not a piece of cake and there are many potential technical pitfalls. Of course, when dealing with the IRS 'it's only wrong if you get caught' ;-).
If you give up leverage and the tax benefits of depreciation, is RE investing worth it? I could see the tax benefit of doing flips in a tax advantaged manner but, that's a lot of work for a benefit so far down the road (maybe for someone closer to retirement it would be a different story and an interesting scenario).
Will, as a financial planner I am interested in knowing the answers to the above questions/scenarios so I can give correct advice to clients if this should ever come up. I'd also like to know how personal liability is handled with RE in an IRA. I have an umbrella policy to cover me personally (accidents, collapsing porch etc) with my RE investments, would my personal policy be able to cover me in a suite rising from RE in an IRA? Would I have to purchase a separate policy for the IRA property with IRA funds? That seems like a very tricky area to avoid crossing the IRC since I would personally benefit from the insurance if it's paid for my the IRA and seems like a very dark gray area if I am paying for umbrella coverage that is protecting me personally from lawsuits arising from RE in an IRA.
Alfred, went back and read your posts. One thing to think about and plan for is that if you cash out the $120k inherited IRA, yes your marginal income goes up $120k for this year, but if you don't have the appropriate amount of taxes withheld from the distribution (some places may force you to withhold taxes-ask your custodian) you will owe quarterly tax payments for 2010 based on an income that is $120k higher this year than normal. So you will get the money tax free for awhile now, but then you'll need to be able to pay 2 years of taxes at once and then get a large refund in 2011 (assuming your income doesn't skyrocket in the meantime). That could come as a real shock if you're not prepared for it.
As far as your "things to think about" you have some very valid points and these should be considered by anyone looking to hold RE in their IRA. Again, it is up to each individual to see if this fits in their plan or not. It is not for everyone. I actually believe the best method to SDI investing is to make loans with 10% minimum returns. It requires no management time/headaches, is secured by the property, and offers a very nice return with minimal effort and very little to no downside like stocks.
1. I wouldn't say "no loans" but as you mentioned they must be non-recourse. While they may cost a bit more, they are easy to get if you buy right and that is really the key. It is not always the cost of the money but the availability of it. You do have UBIT implications but they can be avoided by simply paying off the note 365 days prior to selling.
2. No question. Your personal funds are seperate from your IRA funds and therefore you need to have some capital reserves in the IRA to pay for ongoing expenses that arise.
3. Right on! You do lose the benefit of depreciation but outside an IRA, you get depreciation, but you can alos recapture that upon sale. Must weigh both sides.
4. That is also true and could be in stocks as you mentioned. This is another reason why I prefer to make loans with IRA funds rather than holding RE.
5. Exit strategy is not harder in my opinion if you have the right plan. Planning solves many potential problems and by the time you are 70 you should be pulling out the money anyways.